Costco SWOT Analysis

A SWOT Analysis of Costco Wholesale 2016.

Background: Costco (NASDAQ: COST) is one of the US’ leading three retailers and the largest membership warehouse chain in the world. The brand is well known for its unconventional business model. The America based wholesale company was founded in the year 1983 by James Sinegal and Jeffery Brotman in Seattle. Costco is a successful retail story known for its customer service and low prices. In terms of supply chain management too it has proved itself a leader.

After consistently beating its closest rival Sam’s Club, the brand has moved up in its Fortune ranking from 19 to 18 in 2016. Its Kirkland brand sells nearly everything from detergent to pet food and nuts, and is very popular. Kirkland also accounts for 20% of the entire sales of Costco. Costco enjoys high profitability mainly based upon the enormous clout it holds upon its suppliers. It also allows it to keep its products’prices low. Other factors behind its profitability are big sales volumes and low costs which are a result of efficient supply chain management. Its efficient distribution system and no frills warehouses have enabled it to manage one of the world’s most efficient supply chain systems.

What is a SWOT?

‘SWOT’ is an acronym for Strengths, weaknesses, opportunities and threats. It is a powerful strategic management tool that can help at identifying a business’ important strengths and weaknesses. This helps at planning to exploit the opportunities available to the business and countering its threats. Strengths and weaknesses are internal factors while opportunities and threats are external. A SWOT analysis can improve the business’ chances of success by exploiting available opportunities and increasing the business’ strengths. Based on a SWOT analysis companies can take steps to increase their customer base and improve profitability. Below is a SWOT analysis of Costco Wholesale:

COSTCO Key Financials

Key Financials (last fiscal year)

$ millions

% change

Revenues ($M)

112640

7.1%%

Profits ($M)

2058

0.9%%

Total Stockholder Equity

12303

Employees

153500

Market Value (as of March 31, 2015)

66654

Source: Fortune 500
Costco swot:

Strengths:

Among the most remarkable strengths of Costco is its Kirkland brand of the private level brands. Kirkland offers high profit margins and accounts for 20% of Costco’s total sales. Moreover, compared to its closest rival Sam’s club, it attracts more affluent customers due to which the effect of economic slowdowns on the brand has remained minimal. With its huge market presence, Costco has been a success story and hardly needs to invest in advertising or marketing activities. Everything it does already creates enough media buzz – somewhat like Apple. Apart from everything Costco’s business model depends heavily on its supply chain which is not just efficient but is among one of the best. Costco also holds immense clout on its suppliers for the large purchases it makes from them.

Weaknesses:

Its high geographic concentration of stores is a major weakness. For example 30% of its sales come from California region only. 10% of the brand’s sales come from gas. However, if the prices are already low, there are no incentives for the customers to shop at Costco for gas. Costco’s product mix is also limited as compared to its rivals and the profit margins too are lower. Moreover, a membership is required for shopping at Costco.
Opportunities:

E-commerce still accounts for a minuscule 3% of Costco’s sales. This is the area where Costco can find really huge opportunities. Moreover, focusing on e-commerce could also reduce some of the competition from the major rivals like Amazon. Apart from that, international expansion can also provide Costco with new opportunities of business growth. It can expand its product mix to generate higher sales. However, apart from these, there are opportunities for Costco that can be exploited only through diversification.
Threats:

Costco’s closest rival is Sam’s club and recently Sam’s club has started using more aggressive techniques to expand services to its members as well as to improve its private level brands. This poses the threat of increased competitive pressure on Costco. Its limited e-commerce is another major threat which could lead to the customers gravitating towards the other brands.

Recommendations:
Costco should focus upon e-commerce. This will reduce the competitive pressure as well as help at retaining customers and attracting new ones. Moreover, Costco can gain higher profits by expanding its product mix and through diversification. Costco is a well known and a well performing brand. Still, it is not immune to the competition from Amazon and Sam’s Club. E-commerce holds some excellent potential that Coscto could profitably exploit.

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Abhijeet is an educational blogger writing on topics in literature, management, marketing, and more subjects. Read his posts on cheshnotes.com/blog Read my blog posts

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